• Purchases of the FCI are open-ended (i.e. it has to accept all the grains that are sold to it at the declared purchase price).
• Since the issue price and the purchase price are linked, higher purchase prices result in higher issue prices. With relative high MSPs, procurement has been high and off-take low resulting in a build-up of stocks, adding to the subsidy bill.
• With a large part of the marketed surplus in FCI warehouses, lower market supply exerts upward pressure on prices in the open market, neutralising much of the consumer benefits that subsidy provides.
• To run the excessive stocks down, foodgrains are often exported by providing exporters, foodgrains at near BPL prices.

• The MSP should correspond to the CACP-determined cost (in other words, reduce MSP)
• Purchase operations should not be open-ended. Before every sowing season, procurement targets should be fixed. FCI should suspend purchase operations once targets are achieved.
• A system of price insurance may be developed. The scheme should be self-financing and without any subsidy obligation. This can operate in conjunction with the purchase operations to benefit those farmers who miss out on the opportunity of selling their surplus at the support price because of the close-ended purchase operations.

• The suggestions to reduce MSP and make purchase operations close-ended will certainly reduce the subsidy bill. However, it would not ensure that the subsidy is targeted sharply at the truly needy i.e. small and marginal farmers.
• Another way to reduce subsidy bill is by not using the same instrument to serve conflicting objectives. Presently, the food subsidy policy seeks to achieve through the MSP-PDS operations, the conflicting objectives of ensuring remunerative price to farmers and providing foodgrains to poor at affordable prices. By implication, this entails a huge gap between the purchase price and issue price, and consequently a larger subsidy bill.

• All costs of FCI are automatically reimbursed, and there is little incentive to raise efficiency and reduce costs.

• Reimbursement of costs to FCI should be based on normative unit costs and actual quantity involved, instead of reimbursement on actual basis.
• Some functions of the FCI can be outsourced.
• Move towards decentralisation of procurement to usher in greater efficiency in the purchase and distribution operations

• The role of the Food Corporation of India need to be clearly defined, particularly in the context of decentralisation of procurement.
• There is need to specify how individual state targets would be determined in the context of decentralisation of procurement.

• Concentration of FCI purchases in a few States facilitates tax exportation by some of these States. For instance, Punjab and Haryana impose mandi fees on the purchases of foodgrains. With FCI paying such taxes, the tax gets exported to consumers in other States.

• The tendency for tax exportation by some States needs to be curbed, by appropriate legislation. Since it is easy to identify the States that indulge in this practice, differential purchase prices can be worked out for individual States.

• There should be definite criteria for working out differential purchase prices for individual states, lest it would be subject to political exigencies, particularly in the present coalition era.

• FCI has been involved in price support operations for jowar, maize and bajra. The quantities are becoming larger each year and storage losses are heavy because of limited shelf life. It has proved to be difficult to sell these coarse grains through the PDS and the bulk of the procurement has been sold, at heavy loss, as cattle feed.

—

• Coarse grains should not be included in PDS operations since their shelf life is limited and they are available at low prices to the poor.

• The targeted public distribution system (TDPS) has introduced a dual price system. The same shopkeeper sells the same grain to different classes of consumers at different prices. The system is thus open to corruption.

• Food coupons may be introduced to initially cover only the additional subsidy given to the below poverty line (BPL) families over and above that for above poverty line (APL), while continuing with the exclusive PDS outlets.
• The BPL families would then pay the PDS outlet the same price as the APL families, but partly with coupons and partly in cash.
• Gradually the system could be extended to any foodgrains seller even outside the fair price shops.

• While on one hand the suggestions seek to eliminate the dual system of prices in PDS, at the same time a dual system for distributing foodgrains is sought for BPL families – food coupons as well as ration cards. This may create distortions.
• Once the system is extended to foodgrains seller outside the fair price shops, no separate ration shops would be required.

• There are both inclusion and exclusion errors, and large-scale diversion of foodgrains from the PDS/TPDS network.
• According to a study by Tata Economic Consultancy Services, about a third of TDPS supplies were diverted and did not reach the intended beneficiaries.
• The NSS data on PDS consumption are generally lower than the official data on PDS supply. This may reflect leakages from the PDS.
• Bulk of the foodgrains is pilfered and sold in the market or damaged due to poor storage conditions.

• Self-targeting in PDS can be brought in by:
• Subsidising coarse grains consumed generally by poor alone
• Locate PDS shops in areas where the poor live.
• Allow PDS grain purchase on a weekly basis rather than monthly basis.

• Measures suggested to plug leakages (food coupon system for BPL families) and improve targeting (self-targeting) would have very limited impact in addressing the various concerns.
• Food coupon system, as suggested, will not help solving the problem of foodgrains being sold in the black market.
• Coarse grains should not be included in PDS operations since their shelf life is limited and they are available at low prices to the poor. Though effective for better self-targeting, the suggestion is not worth implementing given the associated costs.

• The monitoring and vigilance system proposed in the TPDS guidelines, which were to involve local Panchayati Raj institutions (PRIs), has not become operational.
• A CAG beneficiary study found non-awareness of entitlements among consumers. The study reported the absence of grievance redressal systems.

—

• PRIs/NGOs should be involved in design, implementation and monitoring of location-specific food distribution/security systems. They should be entrusted with the task of identifying the beneficiaries. They should be roped in to create awareness among consumers about their entitlements under the programme.
• Grievance redressal system should be established.
• NGOs should conduct social audit of the schemes, and report misuse of funds.

• There are wide disparities in PDS penetration in different States.

—

• Food coupons in areas not adequately covered by fair price shops could be introduced

Concerns/Distortions

Suggestions made in the report

Remarks

• FCI’s purchase operations are mainly confined to five states – Punjab, Haryana, Western UP, Andhra Pradesh, and Chhattisgarh. This has led to concentration of farmers’ subsidy to these States. In fact, a large percentage of farmers in these states are not poor.
• Exclusive attention to wheat and rice has distorted the cropping pattern of farmers in favour of these two foodgrains alone.

• Move towards decentralisation of procurement to distribute the benefits of price support operations more evenly across the country.

• Though decentralisation of procurement would ensure that benefits are distributed more evenly across the country, but how will it ensure that these benefits are actually availed by small and marginal farmers and not cornered by rich farmers.
• There is a need to involve local level agencies such as PRIs/NGOs to ensure proper identification of beneficiaries and monitoring of the scheme.